Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

66% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

  • Earnings
  • blockchain

Why the Robinhood share price could continue to drop post-earnings.

Analysts expect Robinhood [HOOD] to report a 23% drop in revenues from the previous quarter when it releases third-quarter revenues on 26 October.

Seeking Alpha suggests one of the biggest drags could be the cryptocurrency Dogecoin, which has fallen 80% in the third quarter. That’s an issue for Robinhood, as 62% of its cryptocurrency trading revenue stems from Dogecoin transactions.

Indeed, the company noted in its second-quarter earnings results that, “For the three months ended 30 September 2021, we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter.”

“For the three months ended 30 September 2021, we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter” - statement from Robinhood

 

Robinhood posted a loss of $2.16 per share in its second-quarter earnings, compared with earnings of $0.09 per share the previous year. However, total revenues reached $565m, up 131% from a year ago and higher than analysts’ forecasts of $559m.

 

Robinhood share price falls on regulatory risk

The pandemic-fuelled boom in retail trading – as people with time on their hands looked to trade and invest in a volatile market – has also faded as economies reopen.

The boom in retail trading helped Robinhood’s share price initially soar to $85 in August after it floated on 29 July. But since then, the stock has plunged 53.4% to sit at $39.59 at the 22 October close.

The main drag has been the threat from the Securities and Exchange Commission (SEC) to ban payment for order flows. This is a practice in which brokers send trade orders to market-makers, who execute the trades in return for some of the profit. In the second quarter, payment for order flows accounted for around 79% of Robinhood’s revenue.

53.4%

Drop of Robinhood's stock since August's high

 

Robinhood already has a high regulatory risk. The Financial Industry Regulatory Authority fined it $70m earlier this year for causing investors “widespread and significant harm”.

Technical glitches were blamed for some traders losing tens of thousands of dollars during the volatile trading conditions, notes the Financial Times. It also allowed customers to trade derivatives when it was not appropriate for them and “gave customers false or misleading information about how much cash was in their accounts and their ability to trade on margin”.

 

Will the SEC ban payment order flows?

Investors will lookout for any new comments from management about the potential SEC decision and whether Robinhood is making any precautionary moves. A ban on payment order flows could put Robinhood’s commission-free experience, which is fundamental to its “democratising investing” business model, at risk.

According to analysts, Robinhood is expected to report third-quarter revenues of $431m, down from $565m in the second quarter.

App intelligence provider Apptopia, as reported by Canadian junior markets analysis site The Deep Dive, forecasts that downloads of Robinhood’s app in the third quarter will have dropped by 78% from the second quarter. This could mean that account openings only totalled 1 million in the quarter, compared with 4.5 million in the second quarter.

Apptopia also forecasts that daily active users are set to have fallen 40% from the June quarter when it had 21.3 million.

“With more shares unlocking in coming months and with the greatest lockup expiration on 1 December, we see the risk that Robinhood shares will come under more meaningful selling pressure and are at risk of underperforming" - JPMorgan Analyst Kenneth Worthington

 

Analysts remain bullish, however. MarketScreener has a consensus outperform rating and a $52.75 target price. Deutsche Bank has a hold rating and a $45.00 target price, and KeyCorp has an overweight rating and a $55.00 target.

The confidence stems from Robinhood’s strong brand identity, especially with first-time younger investors, who like the idea of paying no commission and the comparative ease of making investments.

As reported by The Street, however, JPMorgan believes the Robinhood share price is vulnerable as more insider shares from its IPO are unlocked in the months to come. Analyst Kenneth Worthington also sees trading activity on the Robinhood platform slowing down more rapidly than its rivals. He has an underweight rating and a $35 price target.

“With more shares unlocking in coming months and with the greatest lockup expiration on 1 December, we see the risk that Robinhood shares will come under more meaningful selling pressure and are at risk of underperforming,” Worthington said. “The slowdown is of particular importance for Robinhood given its earnings are far more transaction-based than peers and because we see a higher valuation driven and dependent on account/revenue growth metrics.”

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

  • Includes free newsletter updates, unsubscribe anytime. Privacy policy

Free ebook

Tricks of the trade: 7 interviews with the world’s top traders

Get it now

Related articles